Daily Analysis 6 June 2022 (10-Minute Read)

Hello there,

A magnificent Monday to you as Asian stocks wavered in the first full week of June trading, on rate hike concerns with crude oil nearing US$120 after a sixth week of gains.

In brief (TL:DR)

  • U.S. stocks continued to fall on Friday with the Dow Jones Industrial Average (-1.05%), S&P 500 (-1.63%) and the Nasdaq Composite (-2.47%) all lower and pressure likely to spill over into this week with oil prices soaring and consumer price data due out on Friday.

  • Asian stocks wavered at the open on Monday, roiled by soaring energy costs and the prospect of a strengthening dollar as the U.S. Federal Reserve looks set to hike rates further this month.

  • Benchmark U.S. 10-year Treasury yields rose to 2.94% at the end of last week (yields rise when bond prices fall) and could test 3% again this week, especially if consumer price index data shows that inflation remains stubbornly high.

  • The dollar was flat.

  • Oil gained with July 2022 contracts for WTI Crude Oil (Nymex) (+0.87%) at US$119.90 as supply worries persisted and Saudi Arabia raised prices in Asia by more than expected.

  • Gold gained with August 2022 contracts for Gold (Comex) (+0.42%) at US$1,858.00.

  • Bitcoin (+4.26%) gained out of the weekend to US$31,075 as the benchmark cryptocurrency looked to trade above US$30,000 to prepare for a future rally.


In today's issue...

  1. Value of U.S. & European IPOs Fall by 90% this Year

  2. Could inflation already have peaked?

  3. Are Bitcoin Miners starting to sell?


Market Overview

Global markets are still feeling the sting of last week's better-than-forecast jobs data out of the U.S. and that has investors concerned that the U.S. Federal Reserve won't waver from the pace of its steep interest rate hikes.

Investors will be examining May's consumer price data due later this week to gauge whether inflation has peaked or prices remain stubbornly elevated.

Even if inflationary pressures ebb and the pace of price increases moderates, investors shouldn't bet too heavily on a sharp U-turn on policy by central bankers, who have a tendency to act posthumously, often reacting too strongly in the opposite direction when economic conditions no longer call for such action.

Asian markets were mainly higher at Monday's open with Tokyo's Nikkei 225 (+0.30%), Seoul's Kospi Index (+0.44%) and Hong Kong's Hang Seng Index (+1.07%)up, while Sydney’s ASX 200 (-0.35%) was down in the morning trading session.



1. Value of U.S. & European IPOs Fall by 90% this Year

  • Amount of money raised in public markets by fresh public offerings falls by 90% in Europe and the U.S.

  • Latter half of the year may see a pickup in IPOs if the macro situation improves and inflation pressures start to ease.

Given the uncertain macroeconomic conditions, companies contemplating prospective IPOs have withdrawn into their shells like frightened tortoises and it’s hard to blame them.


With the total value of IPOs in the U.S. and Europe falling by 90% this year alone, and the prospects for new issuances looking increasingly bleak, it would be a brave firm to raise public monies in the current climate.


According to data from Dealogic, just 157 companies in the U.S. and Europe raised US$17.9 billion in the first five months of 2022, compared with the 682 that scored some US$192 billion during the same period last year.


And globally, the value of IPOs has dropped by 71%, from US$238 billion to US$81 billion, with the number of listings falling by over half from 1,237 to 596.


But there are some bright spots in a sea of darkness – oil and gas companies, long considered the pariah of public markets because of environmental concerns, are seeing listings an attractive option against a backdrop of higher energy prices.


Some investors are betting that the adage to “sell in May” and go away, could mean that bargains are had from some of the languishing Class of 2021 IPOs which may see a resurgence after the summer.


A lot could have changed by then, the Russian invasion of Ukraine may have wound down to nothing, inflation may have eased, and central banks may walk back their tightening measures on concerns over slowing growth and rising unemployment.



2. Could inflation already have peaked?

  • Increasing retail inventories and waning consumer sentiment suggest that inflation could already have peaked.

  • Investors ought to be prepared that even though inflation may have peaked, central bankers tend to act posthumously and may keep on raising interest rates even after it no longer makes sense to do so and with the economy already in recession.

Walk into any supermarket and whether it’s the price of chicken or chickpeas, it’s hard not to notice that the same fistful of dollars buys increasingly less of anything these days.


Like a cancer, inflation is quietly eating away at incomes but could it already have peaked?


There is no shortage of economists who argue that supply shocks and blockages could soon ease, and energy costs stabilize and are warning that excessive tightening by central bankers could spark a recession even as price pressures are peaking.


In 2011, the European Central Bank raised rates only to walk them back later that same year, while the Bank of Japan did the same in 2006.


More recently, the U.S. Federal Reserve tried to hike borrowing costs in 2018, only to have to walk that back soon after the markets started to cave under the pressure.


And there is some actual evidence that peak price pressures may be passing – inventories are building up.


Against the backdrop of supply shortages last year, many companies filled out warehouses, including Amazon, only to see demand normalize this year and be stuffed with overstock.


Consumers are growing more cautious as interest rates rise and that overhang of goods will eventually add downward pressure on prices.


According to data compiled by Bloomberg and based reported earnings in late May, inventories for companies on S&P consumer indexes with a market value of at least US$1 billion saw inventories rise by 26% to a whopping US$44.8 billion.


Sectors such as consumer discretionary and technology goods are at real risk of an inventory glut, even as the economic outlook appears increasingly uncertain.


And then there’s the price of housing, with growth appearing to have peaked.


According to the Bank of International Settlements, global growth in real house prices in rich countries slowed to 4.6% annually in the final quarter of 2021, down from 5.4% in the third quarter of 2021.


With interest rates set to rise, the repayment burden on those who have borrowed to fund their homes will increase and with global housing prices some 27% higher than immediately after the 2008 Financial Crisis, there’s plenty of room for correction.


And finally, the elephant in the global economy, China, could see a deflationary shock for demand across the global economy, which is likely to show up in commodity prices.


As the rest of the world cools in its demand for more goods out of China, an already moribund economy will add to supply excesses and scale back demand for everything from industrial metals to agricultural products and energy.


Calculations by Bloomberg Economics suggests that as little as a 1% slowdown in Chinese industrial production could shave as much as 5% off global oil prices.


Will that necessarily change the course of central banks though?


Unlikely.


Policymakers tend to act posthumously and not pre-emptively.


The time to have raised rates was well in the middle of last year, as was the period for tightening.


With a war in Ukraine and souring consumer sentiment, raising rates now would risk recession, but central bankers appear determined to run that gauntlet which will necessarily fuel volatility and

increase the risk of sharp market corrections for risk assets.



3. Are Bitcoin Miners starting to sell?

  • Record flow of Bitcoin from mining wallets moved into cryptocurrency exchanges this month, an indicator that has long been seen as a proxy for selling pressure.

  • Increased demand for Bitcoin on exchanges, including lending and to fund derivative positions could also be responsible for explaining the surge in flows from miners to exchanges as miners look to generate more yield from their holdings.

Being a Bitcoin miner is challenging even in the best of times.


From having to secure cheap and abundant sources of electricity, to dealing with environmental impact issues and regulatory haranguing, the fat margins from mining Bitcoin have long helped to sustain the industry.


But as the soaring price of Bitcoin lured more would-be miners into the industry, the number of new miners contending with higher energy costs are becoming net sellers, when in the past they would have been net “hodlers.”


With Bitcoin threading a tight range between US$28,000 and US$31,000, Bitcoin miners transferred some 195,663 tokens to exchanges in May, their biggest monthly increase since January, according to blockchain data analyzed by Coin Metrics for a total value of around US$6.3 billion.


Miners typically move Bitcoin into exchanges in preparation to sell it, especially when these transfers were from cold wallets that are not connected to the internet.


But just because miners are shifting Bitcoin to exchanges doesn’t necessarily mean that they are looking to sell their tokens, it could also be to generate yield by for instance lending out Bitcoin, or for use to fund derivative positions.


With Bitcoin having fallen by around 35% this year alone, some newer miners who have just entered the fray may be looking to sell to keep their operations liquid.


The rising cost of energy hasn’t helped either, and miners who have secured cheap energy with lower breakeven costs for Bitcoin mining will weather the current market conditions better than those who have to pay more.


Blockchain flow data tracking transfers between miners and exchanges may be seen as proxy for the sale of mined Bitcoin, but that data has its limitations.


For starters, there are now more traders and hedge funds looking to bet against the price of Bitcoin and will need to borrow to do so, with sometimes exorbitant rates, and Bitcoin miners may be looking to get in on some of that action.


There’s also more demand for Bitcoin on exchanges than there used to be in the past, and miners may simply be getting more sophisticated in their quest to generate better yields for their holding of Bitcoin.

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